International Corporate Finance Chp 6:International parity conditions Xin Chen Visiting Associate Professor Aarhus School of Business
1 International Corporate Finance Chp 6: International parity conditions Xin Chen Visiting Associate Professor Aarhus School of Business
International Parity Conditions Some fundamental questions managers of MNEs,international portfolio investors,importers,exporters and government officials must deal with every day are: 路 What are the determinants of exchange rates? Are changes in exchange rates predictable? 特 The economic theories that link exchange rates,price levels, and interest rates together are called international parity conditions. These international parity conditions form the core of the financial theory that is unique to international finance
International Parity Conditions Some fundamental questions managers of MNEs, international portfolio investors, importers, exporters and government officials must deal with every day are: What are the determinants of exchange rates? Are changes in exchange rates predictable? The economic theories that link exchange rates, price levels, and interest rates together are called international parity conditions. These international parity conditions form the core of the financial theory that is unique to international finance
International Parity Conditions These theories do not always work out to be 'true"when compared to what students and practitioners observe in the real world,but they are central to any understanding of how multinational business is conducted and funded in the world today. The mistake is often not with the theory itself, but with the interpretation and application of said theories
International Parity Conditions These theories do not always work out to be “true” when compared to what students and practitioners observe in the real world, but they are central to any understanding of how multinational business is conducted and funded in the world today. The mistake is often not with the theory itself, but with the interpretation and application of said theories
Law of one price The law of one price states that the price of goods of identical quality should be the same in different markets. --Transportation costs must be zero. --No barriers to trade. 袋 Market forces tend to push prices toward equality. Arbitrage:buy the good in the less expensive country and sell the good in the more expensive country
Law of one price The law of one price states that the price of goods of identical quality should be the same in different markets. --Transportation costs must be zero. --No barriers to trade. Market forces tend to push prices toward equality. Arbitrage: buy the good in the less expensive country and sell the good in the more expensive country
Absolute purchasing power parity A primary principle of competitive markets is that prices will equalize across markets if frictions (transportation costs)do not exist. Comparing prices then,would require only a conversion from one currency to the other: P$XS=P￥ Where the product price in US dollars is (Ps),the spot exchange rate is (S)and the price in Yen is (P*)
Absolute purchasing power parity A primary principle of competitive markets is that prices will equalize across markets if frictions (transportation costs) do not exist. Comparing prices then, would require only a conversion from one currency to the other: P$ x S = P¥ Where the product price in US dollars is (P$), the spot exchange rate is (S) and the price in Yen is (P¥)